Joint SMSFs: No such thing as “ours”

SUMMARY: One SMSF – many accounts. Why your SMSF has “yours” and “mine”, but no “ours”.

It’s time to bust a myth about SMSFs. Perhaps it’s more misunderstanding or misconception than myth. But it’s certainly time to crush it.

Your SMSF, if there are two members, has at least two accounts. There is “yours”. And there is “mine”. But there is no account that reads “ours”.

Your SMSF is not a pool of money that both of you own, jointly. It might seem like it. And you may act like it. But that is simply not the fact.

One member has one account with a defined amount of money in it. The other member has another account, which has another defined amount of money in it.

(And if there are a third and fourth member, there are further accounts for each member.)

For many readers who have always understood this, it might sound silly that I am pointing this out. But, believe me, it is a widely held belief that the money in a couple’s SMSF is the couple’s money, jointly.

I can’t tell you how many SMSF trustees I have met who have only a limited understanding of this concept. It’s actually a reasonable misconception, given the way that SMSFs are often set up and reported on.

You and your partner set up your SMSF together. You both rolled in super from various providers into the one SMSF bank account.

You might make the investment decisions together. Your money is invested jointly in the same investments.

The accountants hands you one set of accounts for the fund.

It’s actually right there, usually in the SMSF’s annual return, that you’ll find the evidence. There will be two separate pages at the back of the accounts that read “member’s statements”. On those, it will detail what dollar figure belongs to each member.

As an example, I was speaking with one couple recently, who had a SMSF with about $1.1m in it. They were in their late 50s and had set up their SMSF about three years ago when the husband had left a former employer and was recommended to roll over his defined benefit balance of about $1 million to another provider.

Despite having other professionals assisting them (accountant and stockbroker), they were of the opinion that the money was 50-50. It wasn’t. All but about $35,000 of the money was the husband’s super balance.

Why are there separate accounts in a SMSF?

Because it is no different to any other superannuation fund. Superannuation is on a per member basis.

Superannuation is still owned by the individual. It is an asset, held on trust, for the individual. Governments need to know who owns what so they can properly tax it.

One member might be in pension phase, while the other is in superannuation phase. Without knowing what amount of money is in pension, how would you determine which element pays no ongoing income tax and which element will be paying tax?

One member might need insurance, while the other does not.

And some SMSFs are started not by couples but by work partners, or other acquaintances.

So, should that change anything?

It doesn’t need to change the way you do anything. But it probably will. And in many cases, it should.

The best example of this came earlier this year when the Gillard Government announced it was going to tax pension funds for the first time – the infamous proposal to tax pension funds that earned more than $100,000 a year. (The proposal is now being killed off by the Abbott Government. See last week’s column, 11/11/13.)

Had that legislation come into place, there would have been some very good reasons to spend time getting to know the individual account balances of the individual members.

For example, you could have had a $2.2 million super fund, with $2 million in the name of one member and $200,000 in the name of the other member. If the $100,000 pension tax had come into force, the member with the $2 million account would have likely been paying tax on some of his earnings.

In that case, it would have been worthwhile for the members to do what they could to bolster the account balance of the smaller member, possibly at the expense of the bigger member.

How? By using spouse contribution splitting (transferring the concessional contributions of one member of a couple to the other member’s account), or making sure future voluntary contributions were made into the account of the member with the smaller balance (non-concessional contributions, for example).

Recontribution strategies, where money is taken out of super, then recontributed back into super, can also help in this situation.

It is important to note that even though the $100,000 pension tax is now dead, that might be temporary measure. It could well be reintroduced by a later government, if it can find a way to implement the tax efficiently.

Till death do us part …

When a member dies, the trustees need to know how much money is to be paid out to the nominated beneficiaries, or the estate, of the member.

And if there is a reversionary pension in place, the assets backing that pension need to be known to pay the reversionary pensioner, or later, to determine who that money can be paid out to.

So, are there just two accounts for two members?

As we know, there is a maximum of four members allowed in a SMSF.

And if there are two members, then there will be a minimum of two accounts.

But that does not mean that there is only two accounts. There can be an unlimited number of accounts in a SMSF, depending on the needs of the individual members.

In some cases, it will be a requirement to have more than one account for a member. For example, when a member is on a super pension, but is still working. In that case, they will have both an accumulation account and a pension account.

If both members of the couple are still both working and both taking a transition to retirement pension, then there will be a minimum of four accounts.

There are many circumstances where it makes sense for one member to have multiple accumulation accounts and multiple pension accounts.

For example, a member is making a large non-concessional contribution and wants to keep that money separate for estate planning purposes, perhaps because he is planning on leaving that money tax free to a non-dependant. (Non-dependants have to pay tax on super death benefits to the extent that the money comes from concessional contributions.)

In that instance, the super fund might have a second accumulation account to take the NCCs, which might later be turned into a separate pension, made up of NCCs that can be left, separately, to a non-dependant.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.